What’s happened and what's happening?
As Liverpool FC presents its financial results for the year ending 31 May 2020, almost a year after the year-end date (when in previous years they’ve released results 4 or 5 months after the year-end date), the usual disclosures of revenue and profitability don’t reveal any surprises. The hit taken in broadcast revenues and gate receipts in the second half of the Covid-impacted year resulted in an 8% drop in revenue and a loss before tax of £46m.
The numbers more importantly, though, provide a significant insight into the current financial year, which is about to end in just a month’s time on 31 May 2021. Just a rudimentary projection based on the change in revenue between 2019 to 2020, pro rated for a full year, assuming a Covid impact in 2020 of one-third of a year, suggests a step down in revenue for the 2020-21 season of around £200m in a worst case scenario. This would represent a decline of 37% on 2019 revenues (being the last “normal” year). It is, however, unclear whether the decline in TV revenue (£60m) in May 2020 would be consistently felt throughout the 2020-21 season.
Assuming that the company’s cost base doesn’t change, and profit on player sales are depressed, it would mean that the club could make losses of around £120m by the end of the 2020-21 season. This wouldn’t be surprising at all given that the club reported profits of £33m and £106m in 2019 and 2018, respectively, and loss of £46m in 2019-20. Also the 2018 result included a rather large Coutinho related exceptional income, and 2019 too saw £45m profit from player sales, something that few top clubs like to see as a game-changer to push it to profitability.
This could be exacerbated by non-qualification for the 2021-22 Champions League, which could cost £70m in revenue based on Liverpool’s run in the 2019-20 season that saw them knocked out by Atletico Madrid in the last-16 stage. This could be mitigated to a small extent by automatic reductions in player wages, which are normally included for non-qualification for Europe’s top club competition.
Fans returning to the ground would add a much-needed boost, as would commercial revenue (which increased by almost £30m), though sponsorship revenues will take a tumble with no Champions League football.
What does it mean for player transfers?
Liverpool FC operates a sustainable business model, which currently entails no new share capital injections, a small loan from its parent company, and a relatively small bank loan (with the addition of a new £148m loan taken out in 2019-20, which is discussed further below), all of which is comfortable serviced by its profitability.
However, when it comes to investing in assets, what's important is availability of cash, current level of debt, and forecast cash flow. The loss-making year to 2020 and the current expected loss-making season would eat into cash in some ways as well.
Player costs will be assessed in full form over the lengths of their contracts, so will be analysed both in terms of up front costs, contingent fees and salaries. A lot of this will be contingent on performance related payments, so to some extent future costs will be hedged with success on the pitch.
Looking at the club’s balance sheet, its liquid assets (cash, stocks, monies owed to the club from transfers or revenue generating activities) are far outweighed by its liabilities (the parent company loan, bank loan, monies owing for player transfers, supplier payments etc). The net positions were -£248m, - 313m and -£298m in 2018, 2019 and 2020. In 2021, this is expected to further widen. The parent company loan and bank loan, which add up to around £268m, are not immediately repayable, and the club’s owners may not see this as a risk and could simply leave these outstanding given the cheap borrowing costs they appear to enjoy.
However, the fact that a new bank loan was taken out in the 2019-20 season of £148m (repayable in 2025) may be of some concern. Undoubtedly this would’ve paid for the net transfer commitment in the summer of 2020 of around £35m, as well as contribute to the club’s healthy cash position of £149m (2019: £37m). However, I am in no doubt that expected losses in 2020-21 will eat through much of that cash.
In the absence or scarcity of net cash coming in in the form of forecast profitability, any investment in players comes with risks that require hedging. The club will be confident with the calibre of players it has, along with new recruits, it will be able to recapture the lucrative revenues that come from Champions League football, however, it also knows that most of that will be used to pay salaries and service debts.
The most material way in which the club can raise cash though is also the most difficult way: player sales. You'll see from the financial statements that the top rows take the net liquidity positions into large positive amounts, and £290m of that is the “book value” of its players (note these are not market values, though this is where most of the market value sits). In spite of the constraints in the club’s liquidity position and profitability outlook, this area is the real game-changer for sustainable businesses like Liverpool FC.
A quiet window expected?
My view is that the owners of the club know that the team needs a refresh to inject some new ambition and desire into it, so a quiet window isn’t an option. However, much will depend on whether we qualify for the Champions League, and even more will depend on who we can sell. I expect the club to trim the squad size by offloading fringe players, as well as potentially selling one big player.
Much like moving house when you’re in a chain of home movers, the extent of the overhaul of players will depend on cash raised from player sales, with deals being agreed and arranged in chain form, with dependencies on other deals going through. Overall, I don’t expect the club to be afraid of spending more than they bring in to the tune of no more than £20m in net capital commitment, with a probable increase in on-going personnel costs should there be a player-for-player change by way of a marquee signing in for a marquee outgoing.
That may sound quite low to some, but in relative terms it’s actually very high. When compared to accumulated capital purchases and sales throughout the FSG era. In fact, when taken in context of the club’s financial position and modest performance over the years, it’s in fact quite a high amount.
Since the summer of 2011, Liverpool have seen net capital commitments in transfer fees only of around £307m, giving a rudimentary calculation of average net transfer commitments of £30m per year. Of course, this hasn’t happened in a linear and predictable fashion, but one thing that’s easy to spot is that large sales of players usually follow relatively large purchases (source: transfermarkt).
It could also be argued that, should a player sufficiently young and talented enough, with a high potential resale value, appear on the market as a realistic signing, the club could take an additional risk to sign them. Such an investment could see much of the risk associated with a large outlay of fees and wages mitigated by the asset itself.